Trading tools such as the Moving Average (MA) lines can help us predict the most likely future price movement for any stock. A Moving Average line indicates the average closing price of a stock over a particular period of time. Hence, a 50-Day Moving Average will represent a stock’s average closing price over the previous fifty days. Keep in mind that the daily price fluctuations can often obscure the stock’s real price trend.
If you want a more accurate determination of the price trend, you can use the Exponential Moving Averages (EMA), as they give weight to recent price movements in comparison to Simple Moving Averages giving each day an equal weighting. These lines give a visual representation of a stock’s current price trend.
Let’s assume that the MA line is sloping up. In that case, the stock is in a price up trend and it has more buying pressure than selling pressure. Here, you should purchase call options.
Now, if we assume that the MA line is sloping down, it shows that the stock is in a price down trend. In this case you should purchase put options since the selling pressure exceeds the buying pressure.
Buying and Selling Signals and Pressure
Moving Average lines can help you determine whether a stock is on a ‘buy’ signal or ‘sell’ signal. You can observe this by looking at the shorter term 50-Day EMA line in comparison to the longer term 100-Day EMA line.
If the 50-Day EMA line is above the 100-Day EMA, it shows a price up trend, therefore, you should initiate a call option trade. The buying pressure is higher than the selling pressure and the most likely future price movement is up. This is a buy signal.
If the 50-Day EMA line is below the 100-Day EMA, it shows a price down trend, therefore, you should initiate a put option trade. The selling pressure is higher than the buying pressure, and the future price movement is most likely predicted to be down. This is a sell signal.
This trend following system is a powerful approach that can help you earn more returns from powerful profit opportunities available